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Netflix Bluffs A Price Increase

By cestmoi in Technology
Mon Apr 19, 2004 at 04:51:30 AM EST
Tags: Internet (all tags)

Netflix, a DVD rent by mail firm, has raised their prices in the face of fierce price competition. If you're a Netflix customer, you can call their bluff and get an even lower price than what you're currently paying.

Reed Hastings had a good idea. Why bother going to the local DVD rental outlet when he could just mail you the DVD? Sure, there were delays using the mail but you could more than offset that by offering a library far larger than even the biggest retail outlet could hope to match. If you brought the studios in as partners, they could supply you with all the DVD's you'd need to meet demand. Since your cost of goods is zero, you can afford to have inventory spread throughout all your customer's houses and not fuss about how long they kept the DVD. You could even offer different price plans for different customers - those who checked out a couple of movies at a time would pay a lower price than those who kept 5 or 6 DVD's before returning one. Hastings took that idea in 1997 and formed Netflix.

In essence, Hastings is running a fulfillment service. Each day, he pays someone to open incoming mail, scan and store the enclosed DVD, and someone else to pick and pack newly selected DVD's. He also pays the postman to carry the DVD's back and forth to his customers. At the core, that's his business. The number of DVD handlers he hires rises and falls in direct proportion to his business volume.

In addition to the DVD handler costs, he has overhead costs. That includes rent, interest, equipment, utilities and people to maintain his website, negotiate contracts, sweep the floor, answer the phone, write blurbs about the various DVDs, cut paychecks, pay bills and so on. Those costs are somewhat fixed in that the expenses are needed regardless if Netflix has one or one million customers. In any business, you try to minimize both costs but the key to a high volume business is to make sure you make at least some money on each additional transaction.

It's that last bit that's hurting Netflix and it's hurting them big time. The average customer signs up for the three-DVD out plan which means the customer can keep up to three DVDs indefinitely in exchange for a $19.95 monthly fee. Netflix's problem is that the average customer rents 7 movies a month making the average gross a little under $3 per rental. When the customer returns one or all their DVDs, they get new DVDs. And there's the rub. The happier the customers are with the service, the more it costs Netflix to service them. Since Netflix's income is fixed at an average $20 per month the last thing they want happening is customers using their service because that drives their operating cost up. It's a peculiar business model in that the happier your customers are the more money you lose.

So Netflix compensates for that quirk in their business plan. If you're a heavy Netflix user, Netflix treats you to their passive-aggressive service model. Instead of turning the DVDs around as soon as one arrives, they'll delay shipping your next DVD. Remember that huge library of DVDs that gave them a competitive advantage over the local outlet? It doesn't do the cinephile much good if Netflix won't ship to them.

It's funny how a new idea can become old hat so quickly. When Hastings started Netflix, it was pretty much the only game in town. Hastings leveraged his capital by partnering with the studios. But the studios aren't locked into Netflix and anyone with sufficient capital can enter the same market. Google "dvd rent" and a host of offerings pop up. The most serious competitor is Walmart. Walmart is a company that makes its money by ruthless cost cutting. Sam Walton, Walmart's founder, understood that price is a key determinate in making a sale. Bill Gates learned the lesson very well when he offered DOS for $60 against Digital Research's $200 product. Since customers have a difficult time seeing value other than price, price tends to win out in the long run. Walmart's initial foray into the DVD rent by mail market is to undercut Netflix's price by 25%.

Instead of looking at how to lower their operating costs, Netflix's response was to raise their price. Ford made a similar blunder in the early 80's when Japanese imports were cleaning up. Back then, Ford's offerings lived up to the Fix Or Repair Daily moniker, gobbled gas when real gas prices were higher than they are now and generally missed the market. Ford's initial response to their declining market share was to raise prices. It didn't work and Ford ended up ceding more market share to Japan before redesigning their product lines.

The Washington Post reports that

On Thursday, Netflix, based in Los Gatos, Calif., reported a loss of $5.8 million for the first quarter, more than twice the $2.4 million loss the company reported in the first quarter of 2003. To reverse that trend, the company said it would raise its monthly subscription rate in June from $19.95 to $21.99 per month -- a move it conceded might make some customers unhappy.
As the Post notes, Netflix anticipates that more customers will bail in response to the price increase. If you're a Netflix customer, you can profit from their anticipating your leaving. As of 10:23 PM on April 17th, Netflix customers who cancel their accounts are offered a much better deal than what they had before. In my case, my monthly rental fee was $14. When I clicked the cancel button, they acted like a Tijuana street merchant and said "Wait! Don't Leave! We'll make it $11.95!" If you're a regular 3 DVD-out customer they may not lower the price but something tells me they're clueless as to how the market would react to their price hike and hedged. The pricing meeting would have gone something like this:

"Let's raise our prices!"
"What? Walmart is underselling us!"
"Hmmm. Good point. How about this? Let's raise our prices and if a customer objects, we lower that customer's price. That way the ones who aren't paying attention will pay us more and the price-sensitive customers who would defect to Walmart will stay with us because they're now getting a better price than Walmart's offering! Not only that, Walmart will never know we undersold them because all they'll see is our posted price increase. Net result is our bottom line goes up!"
"Brilliant! Let's do it!"

One drawback with that strategy is it pisses some customers off. Those pissed off customers tell other customers and pretty soon Netflix sees a rash of cancellations followed by re-subscribes at the lower price. So get your red-hot discount before Netflix reconsiders their Tijuana pricing scheme.

Another drawback to the strategy involves posted prices. A first-time customer will look around and see Walmart's lowest price of $15.58 vs. Netflix's posted low price of $21.98 and go with Walmart. Since the first time customer is unaware of Netflix's willingness to discount, they'll go with Walmart's lower price. The nuance of having 22 distribution centers won't drive many first time users just as Digital Research's more subtle features didn't fend off Microsoft's DOS.

A second way to profit involves risk. Netflix's stock is currently offered at $30/share. Etrade reports that that works out to a price/earning ratio of 418. What it says is that you have to pay $418 to buy a company that earns $1. Price/Earning ratios (PE) measure the markets expectation of the growth prospects of a company. For an established, profitable company in a mature market, PE's can range from $5 to $30. At $418, Netflix is ridiculously overvalued. What the market is saying by valuing the PE 15 times higher than a normal high end PE, is it expects Netflix to become 15 times larger than it currently is. Netflix's raising prices against a price cutter like Walmart doesn't make that expected 15x growth too likely. Factor in new delivery models such as Movielink's video on demand and Netflix's current business model loses even more of its luster. If I'm right that the market is grossly over valuing Netflix, the market will eventually react by dropping the PE to a more reasonable 10-30 range. That means the share price will drop by a factor of 13 to 40 or somewhere between $0.66 and $3 vs. its current $30. If it drops below $1 it'll be delisted from the NASDAQ. To avoid that, Netflix will have to buy back shares to beef up its stockholder value. This means that Netflix is probably a good short sell opportunity right now.

Walmart's entry into the market underscores Netflix's key vulnerability - they're losing money if their customers like them too much. That's a terrible place for a business because the only way to deal with it is to piss off your customers so they don't like you so much. The key to success is to make money on each transaction while keeping your customers happy and right now Netflix is losing money on each transaction and pissing off their customers. A more reasonable pricing scheme instead of "all you can watch but not too much otherwise we'll ration you and piss you off" is to charge a fee for a set number that covers your overhead and then incrementally charge for each additional use. Tie that to investing in machinery that minimizes the labor to handle the DVDs. Pepsi and Coke can make money packaging, delivering and marketing sugar water only by automating most of their manufacturing process. Netflix will need to follow suit if they're to survive Walmart.

Secondly, Netflix is going to have to figure out how to deliver movies on demand to fend off becoming obsolete altogether. Netflix exists on its current business because very few homes have fat data pipes. That's going to change. In my neighborhood, I can either buy 1.5 mbits/second via DSL, or for a few more dollars, 2 mbits/second via cable. At 1.5 mbits/second, I can download a movie in under an hour. That's a task that's easily handled overnight. Not everyone will have 1.5 mbits/second but a lot of Netflix's customer base will. The folks that don't have fat pipes are going to be even more price sensitive than Netflix's current customer base. Those facts, defecting high-end customers and lower priced competition, makes the 418 PE all the more unlikely.


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Netflix Bluffs A Price Increase | 78 comments (47 topical, 31 editorial, 3 hidden)
Funny how gringos only know about Tijuana. (1.37 / 8) (#2)
by V on Sun Apr 18, 2004 at 02:45:43 AM EST

I wonder if they had ever dealed with Tepito, La Merced, Metro or any other Mexico City street merchants.

Those might make Tijuana merchants blush.

What my fans are saying:
"That, and the fact that V is a total, utter scumbag." VZAMaZ.
"well look up little troll" cts.
"I think you're a worthless little cuntmonkey but you made me lol, so I sigged you." re
"goodness gracious you're an idiot" mariahkillschickens

considering (none / 0) (#11)
by SocratesGhost on Sun Apr 18, 2004 at 11:34:47 AM EST

that TJ labels itself as "the world's most visited city", should we be surprised at our familiarity?

I drank what?

[ Parent ]
this is not a new deal (2.85 / 7) (#5)
by WetherMan on Sun Apr 18, 2004 at 06:37:42 AM EST

I'm not aware of the time frame of the wal-mart competition, but when I was a netflix customer over a year ago, and decided to cancel my account, I was also offered a similar, cheaper "please dont' go!" option.
fluorescent lights make me look like old hot dogs
They lost 500 million last quarter apparently (none / 3) (#8)
by cam on Sun Apr 18, 2004 at 08:25:27 AM EST

There was an article in the Washington Post business section yesterday on it (saturday). They lost a bunch of money and to recoup it they are raising prices. In the article it included a statement from the CEO that most of the money lost was because of increased advertising due to more competition. I dont see why existing customers should have to pay for that.

Thanks for the tip about cancelling. We were reconsidering our netflix subscription with this increase.

Freedom, Liberty, Equity and an Australian Republic

Ooops (none / 3) (#37)
by sien on Sun Apr 18, 2004 at 09:03:30 PM EST

Check the linked article. They predict revenue of $US500 for 2004 and lost $5.8 last quarter. Not great, but for a growing business not bad either.

[ Parent ]
Thanks (none / 2) (#53)
by cam on Mon Apr 19, 2004 at 08:04:26 AM EST

Not great, but for a growing business not bad either.

With Walmart and Blockbuster getting involved, I think Netflix just discovered they are now in a commodity market. Raising prices in a commodity market with other competitors wont get them far. If the product and the service is about the same, then price will become the main differentiator.

Freedom, Liberty, Equity and an Australian Republic
[ Parent ]

Cell phone companies have been doing this forever. (2.75 / 8) (#13)
by Imperfect on Sun Apr 18, 2004 at 01:20:55 PM EST

When I called to cancel my $60/month plan (don't ask), they asked if I was interested in the similar $40/month plan, the other -- similar -- $30/month plan, the "reduced-rate" $20/month plan, or the "emergency" $10/month plan, all in succession after I had declined the previous ones.

I got a chuckle out of the emergency plan, myself. It's marketed for emergencies like when you're stranded with no gas, but when they pitch it to you, it sounds like "Oh quick, it's an emergency! They're actually going to cancel!"

The best part is that all of these plans come with extras that can easily boost your bill back up over $50/month again.

Not perfect, not quite.
Sprint did the same thing with me. (none / 2) (#22)
by vegetablespork on Sun Apr 18, 2004 at 03:45:32 PM EST

I dumped them for Virgin Mobile long after having asked about a lower priced plan than the $30 + I was on and been told there was no such animal. When they offered me the $10 plan, I mentioned that not only was I leaving them for a less expensive alternative (for me), but also noting that I had been lied to before.

[ Parent ]
Virtgin Mobile & Sprint (none / 1) (#59)
by wierdo on Mon Apr 19, 2004 at 02:24:46 PM EST

Not really on topic, I know, but I just can't resist pointing out how funny it is that the company renting their network to others keeps losing customers to the renter of the network. Perhaps it'll turn out Sprint goes out of business, and takes Virgin Mobile with them, since Virgin will then have no network.... ;)

[ Parent ]
The irony wasn't lost on me . . . (none / 1) (#64)
by vegetablespork on Mon Apr 19, 2004 at 09:00:27 PM EST

. . . either. I figure Sprint will take some action to segment the market, but I don't see what they can do other than to make the prepaid plan less desirable, which will decimate their revenue from Virgin, who can take on underage subscribers that Sprint can't.

[ Parent ]
Credit card companies too (none / 1) (#71)
by grahamsz on Fri Apr 23, 2004 at 03:40:00 AM EST

I phoned up to cancel one of my credit cards, and they immediately offered to: 1 increase my credit limit 2 refund all the charges associated with overrunning my limit in the past year 3 lower my interest rate I'm considering trying to cancel all my financial services on a regular basis.
Sell your digital photos - I've made enough to buy a taco today
[ Parent ]
heh (3.00 / 5) (#15)
by reklaw on Sun Apr 18, 2004 at 02:11:48 PM EST

This reminds me of how I once managed to get three months of free AOL (for my second computer, before I got the wireless networking set up). I took the one-month free trial, and then after that month phoned up to cancel (with the intention of switching to a different dial-up ISP's free trial), but as soon as I made it clear that I really wanted to cancel I was offered another free month. I tried to cancel again at the end of that, and got another free month. Not only that, but I was offered yet another free month at the end of my three free months that I had to turn down repeatedly ("no, I really want to cancel") before the guy would shut up about it.

I don't see how such practices are good for business, though.

Sometimes it makes sense (3.00 / 8) (#19)
by godix on Sun Apr 18, 2004 at 02:49:06 PM EST

Say a business has high fixed costs that they have to pay regardless of if they have few or many customers (IE a modem pool, bandwidth already contracted for, etc) then it makes sense to give freebies rather than let things just sit around collecting dust, after all some of the freebies will turn into paying customers. Keep in mind that it's MUCH more expensive to gain new customers than to retain the ones you have. If keeping a customer means giving them free services that costs $5 but replacing them with a new customer costs $10 in marketing then giving away freebies makes even more sense. I personally think AOL long ago crossed the line between where this makes sense and where it's an easy and often exploited way to get free service but the fundamental idea behind it is good for business if it's kept to a reasonable degree.

Thank god I'm worth more than SilentChris

[ Parent ]
for what it's worth, (none / 3) (#49)
by Rahaan on Mon Apr 19, 2004 at 01:11:07 AM EST

Not only have I experienced this exact same thing (through a friend of mine) - but most cell phone companies in the US behave exactly the same way.  Customer retention will throw all kinds of goodies, discounts, and rebates at you for almost no reason, especially if you've been a customer with them for a while.

And that's just the service.

They are the same with buying phones - they're booked at hundreds of dollars, or whatever, but between the store guy wanting to make a sale, the company wanting new customers, and the sheer number of inventory they have to move, they have all kinds of hidden rebates they can give you.  I just got a new phone listed in the store as $200 for just over $25.  Everybody makes out on the deal, and the companies still get a certain percentage of people to pay the full price and make out like bandits.

you know, jake.. i've noticed that, since the tacos started coming, the mail doesn't so much come as often, or even at all
[ Parent ]

Re: for what it's worth (none / 0) (#69)
by blakdogg on Wed Apr 21, 2004 at 12:38:16 PM EST

Not only have I experienced this exact same thing (through a friend of mine) - but most cell phone companies in the US behave exactly the same way. Customer retention will throw all kinds of goodies, discounts, and rebates at you for almost no reason, especially if you've been a customer with them for a while. I didn't get the hard sell when I cancelled my Sprint PCS service. It was surprisingly easy to cancel the service, the only 'problem' was their refusal to prorate my last month of service. I was a bit disappointed, I expected them to at least make some effort to retain me as a customer.
Woe be onto the United Nations, there nothing but a front.
[ Parent ]
If you forget (3.00 / 5) (#52)
by blakdogg on Mon Apr 19, 2004 at 07:55:45 AM EST

AOL (2000) needs a credit card to open a free account, if you fail to cancel in time they will charge you for the upcoming month. Since AOL does not allow you to schedule a cutoff, this scenario can/will be repeated until you get it right.
Woe be onto the United Nations, there nothing but a front.
[ Parent ]
Fucking AOL are worse than Vodafone! (none / 2) (#62)
by vyruss on Mon Apr 19, 2004 at 06:35:00 PM EST

When I wanted to cancel my account with AOL UK they started asking for the reason. I said I did not need an Internet account anymore. And then: are you not satisfied? is it my hairdo? blah blah blah... NO! I JUST DON'T NEED AN ACCOUNT ANYMORE. Could I interest you in blah blah blah... I WOULD SIMPLY LIKE TO CLOSE MY ACCOUNT. Then they went on, so I started replying only with NO THANKS for the following 5 minutes. They finally closed it but fortunately they'll never see my money again.

  • PRINT CHR$(147)

[ Parent ]
+1 FP (none / 1) (#23)
by gr3y on Sun Apr 18, 2004 at 04:14:55 PM EST

and I'm hoping to read similar stories about other emergency, "last minute" pricing plan changes. Maybe I'll post my letter to CU - that was over just one dollar.

I am a disruptive technology.

Two words (none / 3) (#26)
by sticky on Sun Apr 18, 2004 at 05:20:17 PM EST

Short sell.

Don't eat the shrimp.---God
Sure looks like it(n/t) (none / 0) (#31)
by cestmoi on Sun Apr 18, 2004 at 07:48:45 PM EST

[ Parent ]
Thanks for advice (none / 3) (#28)
by Bossk on Sun Apr 18, 2004 at 05:56:21 PM EST

I used your reccomdation to reduce my 3-movies-out-at-a-time plan to 15.99 from $21+. Also, the Walmart web interface is lacking in features compared to Netflix. They also have a poor movie selection. I checked Blockbuster, as you mention them, but I cannot find an online dvd rental service.

Blockbuster doesn't seem to promote it... (none / 1) (#41)
by Patrick Bateman on Sun Apr 18, 2004 at 11:07:42 PM EST

... but they purchased a DVD rent-by-mail service called Film Caddy. It looks like they currently only ship out of Arizona, and I hope that changes as the company is integrated with Blockbuster.

I have to return some videotapes.
[ Parent ]

Best online DVD rental service I've found (3.00 / 5) (#57)
by geekstreak on Mon Apr 19, 2004 at 01:16:55 PM EST

I use GreenCine (greencine.com). Great service so far and I love their selection. Similar prices to Netflix. They specialize in indie, art house, and international, but they have the mainstream stuff, too. They have some cool community features -- you can review movies, create and share lists, maintain a profile, etc.

[ Parent ]
Oh crap :( (none / 1) (#40)
by solstice on Sun Apr 18, 2004 at 10:33:32 PM EST

I went to cancel my 2-out and it actually just cancelled it without offering me any kind of lower price deal. WTF! Maybe too many people were cancelling?

YHBT (none / 3) (#42)
by Patrick Bateman on Sun Apr 18, 2004 at 11:14:00 PM EST


I have to return some videotapes.
[ Parent ]

I thought that might happen (none / 1) (#51)
by cestmoi on Mon Apr 19, 2004 at 07:51:43 AM EST

No, I didn't troll you - I really was offered 10% off if I stuck with Netflix. The two out pricing model is clearly Netflix's least favorite offering and it wouldn't surprise me that they would withdraw the discount or conditionally offer it. They may have offered it to me because I can go 6 to 8 weeks without having time to watch a video which means that was gravy to Netflix. If you otoh, were an active customer, they may figure it was better to say "OK, we can't afford to serve you."

Nonetheless, if you were an active 2 out customer, you were going to get nailed by their new 4 out per month cap. In that case, you're better off with Walmart's $15 offering which isn't capped.

[ Parent ]

Yeah (none / 0) (#55)
by solstice on Mon Apr 19, 2004 at 09:46:27 AM EST

We were much less active lately anyway, so I was already considering cancelling. I had just moved down to the 2-out plan from the 3 a month or two ago. I guess they have some kind of formula to determine who gets offered the deal. Oh well I guess I'll just rip the DVDs I have now until I can watch them, and then maybe try Walmart :)

[ Parent ]
Netflix Are Spammers (2.75 / 4) (#56)
by Erbo on Mon Apr 19, 2004 at 12:10:55 PM EST

I decided not to do business with Netflix a while back, because they send spam. (That's not my page, but the guy who posted it apparently got the same spam messages I did.) I encourage everybody to avoid doing business with them until they stop abusing our inboxes.

(Yes, I posted this as a comment to a Netflix story on The Other Site. It's relevant here, too, in my opinion. And, yes, I have personally received spam advertising Netflix.)
Electric Minds - virtual community since 1996. http://www.electricminds.org

ditto (none / 0) (#74)
by wad on Wed Apr 28, 2004 at 03:25:07 PM EST

I was just about to join Netflix when some marketing idiot working for them dropped a couple of unsolicited emails in my inbox.

My principle of refusing to do business with a spammer won out over my desire to stop visiting Blockbuster.

I wonder how many other customers they lost through spamming?

[ Parent ]

Tried it and netflix just sent me the following... (3.00 / 4) (#58)
by Vermifax on Mon Apr 19, 2004 at 01:30:46 PM EST

I cancelled and got offered the $12 plan for 6 months then going to $15 with netflix so I took it. About an hour later I got this in my email.
Congratulations, you have changed your program for the next period. On 05/17/04, you will switch to the Netflix program: 2 Out At $13.95 - Up To 4 Movies A Month http://www.netflix.com/Terms
So I went all the way and completely canceled.
- Welcome to the Federation Starship SS Buttcrack.
Don't try this if you are a heavy user (none / 2) (#60)
by Sacrifice on Mon Apr 19, 2004 at 02:37:14 PM EST

I cancelled my 3-out subscription and wasn't offered any deals.  My guess is they only try to retain customers who don't use the service heavily (or they have realized they made a mistake).

Maybe not (none / 0) (#77)
by treetops on Fri May 07, 2004 at 11:11:23 PM EST

I cancelled on the 3 movie plan, after renting a total of (I think) 3 movies througout all of April. I didn't get the offer, but I wouldn't have taken it if I did. Kim's is cheaper and has a good selection, even if it is staffed by prentious morons.
[ Parent ]
Screw Netflix (3.00 / 4) (#61)
by wierdo on Mon Apr 19, 2004 at 02:40:35 PM EST

While I don't like to see Wal-Mart take over another market, I'm not too unhappy about Netflix's woes. Once upon a time, I was a very happy Netflix customer, first paying the $15.95/mo you can apparently badger Netflix into giving you now, only I got 4 movies at a time. Then they added taxes. Later, they raised the price to $19.95/mo, and I still wasn't unhappy, just not quite happy. It was worth it to me to be able to keep a couple of movies I much enjoyed and rotate out a couple a few times a month. (I had one of their copies of Ronin, a dual-sided disk, for over two years..after canceling Netflix, I bought the 'new' single-side version) All was well.

Then one day, the expiration date on my credit card changed. So what do they do, but immediately cancel my account, and refuse to let me have the 4 movies for $19.95 back. The irritating part was that they didn't send the nicely informative form e-mail to point out that my card didn't go through, nor did they give their usual week or two to get things sorted out. Even as nearly the perfect customer who rather than cost them money just kept discs for an absurd amount of time, they screwed me. Don't expect they'll do anything better for those of you that actually use your service.


P.S. DVD rental by mail is awesome, but all of the currently-operating services suck, too. I would probably be willing to pay $30/mo for 4 out if it was done by a company that actually did it right...like Netflix in the distant past, when they gave me a free plastic DVD holder with their old logo (from the yellow mailers; the second or third iteration of the logo, I believe) emblazoned on the front and sent my movies in a timely fashion.

Yeah (none / 0) (#65)
by CaptainSuperBoy on Mon Apr 19, 2004 at 10:35:35 PM EST

One of my friends got his Netflix account cancelled for the same reason. They apparently cancel it immediately and without giving any notice.

jimmysquid.com - I take pictures.
[ Parent ]
ignorance (1.00 / 14) (#63)
by parasite on Mon Apr 19, 2004 at 08:24:09 PM EST

I very much resent the article author's absurd and very offensive assertion that Pepsi is essentially selling a form of "sugar water". Pepsi is the most superior form of beverage that has been ever, and will ever be conceived during the history of mankind. It is with this in mind that we most VEHEMENTLY defend it's true status, being absolutely intolerant of a single stray word of abuse against this most god-worthy creation. Join with me fellow Kur5hin.org'ers and demand a sincere apology -- an attempt that, should it be futile, must lead to far more deadly action against the aggressor.

Pepsi is crap (2.00 / 4) (#66)
by Insoc on Mon Apr 19, 2004 at 10:38:38 PM EST

And a super-sweet version of Coke without the nice bite. Plus, Pepsi's commercials of late have really irked me for some reason. Since when is one company "hipper" than another? Aren't they all full of old, fat, white men?

[ Parent ]
You said it exactly. n/t (none / 0) (#68)
by Fon2d2 on Tue Apr 20, 2004 at 04:26:16 PM EST

[ Parent ]
Pepsi (none / 2) (#67)
by spakatak on Tue Apr 20, 2004 at 02:22:18 AM EST

Sucks. I'm sorry, but it has nothing on Coke.

In any case, Dr Pepper is even better.

[ Parent ]

Dr Pepper (none / 0) (#70)
by parasite on Thu Apr 22, 2004 at 10:51:22 PM EST

once earned a boycott from me for a period of 2 years by putting the most disgusting hick-infested country-music commercial I have ever seen on my tv screen. It was more the embarassment measure of being seen drinking it than anything...

[ Parent ]
Check your math regarding video on demand (none / 0) (#72)
by tji on Mon Apr 26, 2004 at 09:23:44 PM EST

At 1.5 mbits/second, I can download a movie in under an hour

1.5 Mbps = 187.5 KB/s = 11.25 MB/min = 675 MB/hr

So, at the maximum theoretical peak speed for the DSL connection, maintained for one hour, you can download a CD, not a DVD.

It would take you 14 hours to download a full DVD.

Most DVD's don't use the full capacity. But, even at 7GB per DVD, it's over 10 hours. If you use a realistic download speed, you're back closer to 14-15 hours.

(Yes, I know you can make movies smaller.. for those people who don't care about quality, and want to watch a movie sitting in front of their computer. But, this article was specifically about Netflix - DVD rentals - so, downloading an equivalent product should be compared.)

Yet you forget... (none / 0) (#78)
by tabris on Sat May 08, 2004 at 12:21:08 AM EST

Yes. you can download 700MB/hr. That's one movie. in DivX. which is almost as good as MPEG1 at 4GB. Sure sure... DivX is typically used for 'illegal ripping'. and will of course be less quality than the full DVD b/c it's a lossy algo, from a lossy source. But, if they used DivX on the raws... it might even be BETTER than DVD. Maybe.

Now if only the various sub groups could make up their mind on what video or audio codec they use, and not change it every 3 months.

[ Parent ]

Financials need some work. (none / 0) (#73)
by tji on Mon Apr 26, 2004 at 09:43:53 PM EST

I was with you until it came to the financial data..

Expressing P/E ratios as dollar values does not make sense. (PE's can range from $5 to $30. At $418, Netflix is ridiculously overvalued.).

In any case, the P/E is not terribly relevant with small earnings numbers.. It's just basic math that as E approaches zero, P/E will grow exponentially. Take a look at their forward P/E and you'll see it can quickly drop to a reasonable number. Your further extrapolation of this number further detracts from any point you were making (though I'm not sure what that was.. other than you're pissed at Netflix for raising your subscription fees).

Walmart's entry into the market underscores Netflix's key vulnerability

How is that? A competitor entering a market would seem to imply it's a valuable market to be in. Also, how does Walmart's financial model for DVD rental-by-mail differ from Netflix?

And, the final bit of silliness - comparing netflix to Coke/Pepsi's production methods.. what does that have to do with anything?

The *real* problem, with a built-in solution (none / 1) (#75)
by pla on Thu Apr 29, 2004 at 06:46:41 PM EST

The problem: Increased volume leads to decreased profits.

The solution: Stop offering free postage, and tack on a very small "handling" fee (as in, less than 3x the cost of the one-way postage).

This would annoy a few people (mostly those who already use NetFlix heavily and have gotten used to the free postage), but I suspect most people wouldn't really mind, on doing the math...

From NetFlix's POV: Let's say they charge $0.50 per disc, which includes a postage-paid return mailer. For bulk mailing of DVDs, NetFlix probably pays between 14 and 22 cents per disc. That leaves at least 6 cents additional profit per DVD shipped. Furthermore, since they no longer bear the brunt of the shipping fees, a 3-discs-per-2-days user goes from costing them almost the entire monthly subscription fee ($19.80 at $0.22/disc/direction), to making them an extra $2.70. Netflix could afford to halve the monthly rate, making everyone happy, and still most likely come out ahead.

From the customers' POV: If NetFlix halved the monthly rate with this move, a "typical" customer would most likely still come out ahead. Of the people I know that use NetFlix, only one rents more than 20 per month (the breakeven point at $0.50/disc). So, most people would actually pay less. For those who make use of the highest possible turnaround time, theoretically 3 DVDs per 2 days, they would end up paying an extra $10 each month. At first, that sounds pretty bad, but compare it to the likes of Blockbuster... 45 movies per month at Blockbuster would cost over $150. Aside from occasional coupons, the cheapest way I know to get movies from a physical store involves Movie Gallery's Wednesday night deals ($1/movie just for a single night, and if you rent 3 non-new releases, you get two more free... So $0.60 each). And since you can only take advantage of that one night per week, even if you could manage to watch ten movies in 24 hours, you'd still pay ten cents more per movie.

Hey, I like the idea of free postage as well. But I like the philosophical idea of NetFlix a whole lot more than free postage. If they need to charge a small per-disc fee to stay in business, I have no problem with that.

Of course, if they get greedy and try to go much beyond covering the actual cost of postage (ie, $1.00 per shipped disc), then the benefits would vanish. But at $0.50, I'd still consider it a damned good deal.

Walmart and Censorage (none / 0) (#76)
by iheartzelda on Mon May 03, 2004 at 03:58:36 PM EST

Does Walmart censor their DVD's? I know they don't sell explicit CD's and I am pretty sure that they don't have explicit mp3's on their mp3 service.

Although I guess DVD's are slightly different? Anyone know for sure?

Netflix Bluffs A Price Increase | 78 comments (47 topical, 31 editorial, 3 hidden)
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